Thursday, January 7, 2010

Argentina's President Moves to "Tap" Bank Reserves

I really need to do a post on Argentina one of these days. This whole blog could be devoted to Argentina's recent economic history over the past two decades, which is almost a perfect case study in Austrian economics. Argentina has a problem of uncontrolled borrowing and is now saddled with debt it cannot repay. It has been this way for awhile, and they have attempted to both default and inflate their way out of debt, and still they are in trouble.

What brings this up is Argentina's President, Christina Fernandez de Kirschner, is seeking the equivalent of $6.6B from its bank reserves [1]. Basically, tax revenues are insufficient to repay the public debt, and issuing new treasury bonds is becoming expensive [2]. So she is seeking money from bank reserves, and I would bet against the likelihood it will be repaid. It would amount to an inflationary injection of currency, debasing the money supply for the whole nation.

Essentially she is trying to force their Central Bank to invest in interest-free Treasury bonds with newly printed money. This is a bottomless black hole. Central Bank President Martin Redrado wisely told her to take a hike, and now his job is in danger.

This is a power struggle that I forsee the bank will win and the president will lose. People who bought Argentine bonds had no intention of seeing their investment lost to inflation. UPDATE [1/8/10]: I didn't expect things to happen this fast, but this play by the president has already been blocked by the courts [3]. No doubt there will probably be more back-and-forth, but ultimately I think where things are today is where they will stand. Redrado already has his job back [4]. My guess is, President Fernandez will be losing hers soon.

From the CIA World Factbook: Argentina's GDP is $575B, tax revenues are $87B with a public debt of around 49% of GDP, or $288B. This is why the common "Debt-to-GDP" ratio is unreliable and needs to be disregarded; Argentinas debt-to-GDP isn't too bad, but its debt-to-revenues is worrisome.

1. Argentine Central Bank Ouster Frees Fernandez to tap Reserves.
2. Argentine Battle Over Central Bank Reserves Deepens.
3. Argentine Bonds Fall After Judge Blocks Use of Reserves for Debt.
4. Ousted Argentine Central Bank Chief Redrado Returns.

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